Delivering the Goods: The Art of Managing Your Supply Chain

By Damon Schecter, Gordon Sander

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Master the receipe and you achieve efficiencies and savings. Becoming a better global competitor is just the icing on the cake.

In order to "wring the fat out of the supply chain process," a company needs to understand that it is part of an extended enterprise. You and your company officers need to look beyond the physical and political boundaries that are currently constraining and restraining you—whether you realize it or not—and break down the walls separating you and the other members of your supply chain, in a rational, easily codifiable way.

The Tri-Level View is that code.

In the short space we have here, let us summarize the Tri-Level View, and then turn immediately to opportunities for achieving our global objectives with the Tri-Level View.

Essentially, you need to break down your supply chain into three levels or layers. Layer one comprises your physical assets, layer two comprises processes; layer three comprises measurements. By looking at your company's supply chain from this perspective, you can go on to break down the walls that prevent you from optimizing your supply chain.

The Top Layer: Company Assets

First, let us zoom in on the top level of the Tri-Level View and look at your company's assets. Your assets are, well, your assets, the physical portion of your supply chain—that is, all the physical things that have anything to do with distribution or delivery. That means, principally, your distribution centers and your means of transport: your trucks, planes, boats, dirigibles, whatever. These are your assets.

Well, maybe not dirigibles. But you get the picture.

At the same time, let us see how we can relate these assets to your global objectives. In a nutshell, what you and your logistical optimization team are aiming to do is minimize your assets, and optimize their location while maximizing the efficiency of your operations by introducing economies of scale.

Distribution Centers

Now, let us go into a little more detail about those assets. Let us start with distribution centers.

How many of these should you have, and where should they be located?

In answering this question you need to consider trade-offs between costs for inventory, transportation, the facility itself, handling, and potential lost sales and production time. And then there's the question of whether it is better to be closer to the final end consumer, to the sources of supply, somewhere in between, or in different locations, depending on which product line we are talking about.

Once you're comfortable that your distribution centers are in the right place, how large should each warehouse be? Develop a forecast of demand for your organization's products to help you determine how much space you need.

Would a flow-through warehouse, or cross dock, help move products through the distribution center more quickly?

This is different from a warehouse, where the whole point is that goods are buffered for a period of time.

Should you own all your distribution centers, or could you rent space in a warehouse owned by someone else?

Consider how stable demand is for your product, and how much control you feel you need over the facility. Also consider the financial investment you are gaining versus the flexibility you need to meet your changing needs. And remember, there is always the option to hire a third party to actually operate the distribution center that you, in fact, own.

These are some of the questions you should be asking yourself as you schematize, rationalize, and optimize your company's supply chain with the Tri-Level View.

There will be more questions, and hopefully, more clarity as your new prismatically clear view comes into focus.

Are you a believer in a greater number of small distribution centers distributed across the markets you serve, or do you prefer fewer, larger, more centralized centers?

Usually only larger firms need to consider this question. Normally, the trade-offs between these two sides of the logistical equation tend to be driven by the concentration of customers in specific regions versus their equal distribution and ability to be serviced by a single, better equipped, central facility.

More questions, more clarity.

How should your distribution center be laid out?

Consider how much capacity you need, how many employees you need, how productive each employee can be. At the same time, you should consider the opportunities for mechanizing the distribution process, as well as ways to maintain a consistent flow of goods through the distribution center.

As they say, you can't know the answer if you don't know the question.

Which items should be stocked in which distribution centers? In determining whether all locations should carry the entire product line, should your distribution center be limited to processing one particular product line? These are some of the other questions you and your logisticians need to be asking yourselves as you measure your company's logistical I.Q.

Transportation

Now let us turn to transportation More questions, more factors to be considered.

Are you always going to need a full truckload to transport goods, or can you make do with less than a truckload?

Should you use private or public transportation?

Private carriage, as it is called, is a vehicle for adding value to goods, not a source of revenue. Wal-Mart and Pepsi are examples of private carriers. Common carriage, like UPS, is used on a piecemeal basis. Contract carriage fits somewhere in between, where for a price you can customize the contract that fits your needs.

How big a fleet do you need?

Take a look at your current routes and the volume of goods you move to determine if a bigger or smaller fleet makes sense.

Can you make do with one way transportation, or is closed loop (there and back) the most economical way to go? How much are you spending to FedEx goods back and forth?

Sometimes, spending millions of dollars expediting parcels back and forth between manufacturing plants saves more than enough time to compensate for the ludicrous costs. However, more often than not, better foresight and planning can help reduce the need to overnight goods day after day.

Equipment

Do you have the handling equipment you need?

Oftentimes when the number of facilities and transports is reduced, so is the equipment that normally goes along with them. Be sure that your equipment is not carrying much smaller loads than it is capable of carrying, or traveling greater distances that it was designed to travel.

Inventory

Try the touch test to see if excessive dust is sitting on boxes in your warehouse. If so, you might have inventory that has been sitting there too long.

Have you considered establishing a quick-response relationship with your trading partners?

That is a relationship in which a wholesaler or manufacturer commits himself to meet specific performance criteria in exchange for the retailer providing information about demand, and promises to prominently display the manufacturer's goods.

Why not take a look at that popular creature known in the trade as Vendor Managed Inventory (VMI)?

With VMI, the wholesaler goes so far as to directly monitor and manage inventory on a retailer's shelves. The retailer gives the wholesaler access to its inventory information. In return, the wholesaler's product managers, take on the job of managing the balancing act between too much inventory and too little inventory on the retailer's shelves.

Have you considered that sovereign logistical remedy known as Efficient Consumer Response (ECR)?

In this mutually beneficial logistical scenario, the wholesaler and manufacturer work closely together for the purpose of reducing the paperwork that would normally be needed in order to replenish (refresh) inventory in the wholesaler's warehouse.

Have you considered managing your inventory in a push-vs.-pull manner?

Pushing as much of your product on to store shelves in order to meet sales forecasts, or simply to save costs on production and shipping, is not always the best idea. Waiting for retailers to pull inventory onto their shelves could be a more efficient way to go, although this option needs to be weighed against the investment costs of managing a pull system.

Have you considered establishing a standing delivery schedule between facilities?

The Middle Layer: Using Personnel and Assets Productively

Now let us move onto the processes, or middle layer of the Tri-Level View. Here the emphasis should be on using your personnel and assets in the most productive way.

How is your labor being utilized?

Watch out for high levels of absenteeism over time. Ask staff members how much time on average is wasted because of inefficient equipment, information, or procedures. Ask this question frequently to find opportunities to save time (i.e., save money).

How are your safety records?

Watch out for unsafe practices in your facilities, and be sure safety equipment is where it should be.

Can you reduce distances traveled or materials handled?

Look to see whether goods are handled twice. Look for goods traveling excessive distances. Look for goods backtracking over the same area.

Can you reduce picking time?

There are many different ways to store goods. You can put the most popular items near the front. Alternatively, you can set up specific areas for specific products.

Should you reevaluate stock location?

When it comes to deciding where to put goods in a warehouse, ask yourself: Should there be a fixed location for each type of goods, or should there be a random location allocated at the time the goods are ready to be stored? Take a look at the type of goods you handle and their specific demands to help you decide.

Have you considered direct plant shipments? By having goods shipped directly to their ultimate destination, you may save the trouble of transferring goods to an interim location.

Are you comfortable with your return system? Take a look at how you are currently handling trade-ins, repairs, and defective goods.

Have you balanced your ambitions for just-in-time supply with your needs for just-in-case supply?

This is a delicate balancing act. Do you want to improve customer service by having a lot of extra supply hanging around, and with contingency supply in the event of disasters? Or do you want the efficiency of only having inventory when you need it?

Have you considered smoothing? An example of smoothing is using a warehouse to hold your unsold winter inventory during the summer months. Then, when next winter comes around, your sales people are not caught off guard with nothing to sell.

Have you considered whole-order delivery? That is what happens when a company decides to hold onto an order until all the parts of the order are ready. Only then, when the order is complete, is it shipped onto the customer. Mail-order book companies often use this strategy. The book company will wait for all the books in an order to be on hand before shipping the order to the end consumer. The book company subsequently saves on shipping costs. Alternatively, the book company could immediately ship books on hand, and follow up with a second shipment of the books that needed to be special ordered.

Do you see any opportunities for product postponement? An example of this expeditious procedure would be postponing the last few steps of assembly for a product until demand for it arises. Food processing companies often postpone putting labels on cans of corn until an order is placed, because the same can of corn might be sold under six different company labels.

Goods Broken Apart and Put Back Together

The activities described below are all typical supply chain activities. Your optimizing opportunity here is to move these activities out of the distribution center and over to other places.

For example, you might reconfigure goods on the back of the truck, or in the back of the store, or on the way from the manufacturing facility.

Have you looked at substitution opportunities? The idea of substituting one good for another, or information for inventory, comes into play here. If you need to attach two items, either tape or glue can serve your purpose. You may find that one is surprisingly cheaper and more available than the other.

Have you considered product mixing? For example, when a new shirt design is available, a store will normally want a mix of small, medium, and large versions. Your store can place three separate orders: one for three smalls, another for three mediums, and another for three larges. Alternatively, it might be easier for you as the manufacturer to configure a single mix of three small, three medium, and three large shirts. Then the store only needs to place one order.

Have you looked for break bulk opportunities? For example, a wholesaler might buy bulk containers of soap, and reconfigure the soap into smaller plastic bottles. These smaller bottles are then sold individually to local stores.

Do you see any opportunities for putting items together into a kit, or kitting? For example, a toothbrush and toothpaste can be packaged together and sold as a travel kit. Common sense. Logistical common sense.

Can you consolidate goods for transport? Shippers give discounts for shipping larger quantities of goods. For example, shippers often give discounts to companies that use full truckloads rather than more cumbersome less-than-truckload shipments. Look for ways to reach the shippers' threshold to achieve a discount, for example, by holding up outbound shipments until the threshold is met.

Is there a way to merge goods while in transit? Oftentimes goods are left abandoned for lengthy periods of time on the dock of a warehouse, in effect, destructively buffered. These "orphan" goods are left waiting for related goods to drift in at their leisure. Finally when all the rest of the shipments arrive, these are shipped to another warehouse, where they are orphaned or destructively buffered again. Not good.

Have you taken a look at the kinds of packaging your firm uses to wrap goods? This is another obvious, and often overlooked place for optimizing delivery. For example, at a certain electronics manufacturer I am familiar with, the person responsible for the packaging learned the hard way that a particular shipping box design for a new product was not surviving shipment from the manufacturing site to the intended wholesaler. It was then shipped in a deplorable state to the end consumer. The problem was only discovered after several consumers shipped the product back to the manufacturing site for repairs, where it became apparent the product was damaged.

Have you considered customized packages that help your customers make more immediate use of your product? One possibility here might be a box that helps a retailer display your product.

When Goods are Being Modified

Have you considered moving your manufacturing or assembly activities, assuming you have them, into the distribution channel? For example, one logistically challenged sweater manufacturer of my acquaintance, after taking a closer look at its operations, found that its planning managers were misforecasting whether consumers would want more green or blue sweaters. Subsequently the manufacturer decided to forgo dying sweaters at the time of manufacture. Instead, it chose to ship all sweaters to the stores in a single light color. The stores could then dye the sweaters themselves as they needed. A creative solution; a logistically creative solution.

Have you taken a look at damaged stock and the corrosive role it plays in your supply chain? Are your staff members rightly setting damaged goods aside? Survey your customers about damaged goods coming from your warehouses, and see if that is a problem. If it is, investigate and eliminate it.

The Bottom Layer: Measuring SC Effectiveness

Now we are ready to move on to the bottom layer of the Tri-Level View, the side of our handy logistical prism that allows you to refract and measure the effectiveness of your supply chain.

Let us look at costs first. As is so often the case, the best solution is not necessarily the most obvious one, or the cheapest. In fact, reducing costs doesn't always help you reach your objectives. Sometimes increasing costs locally is best for the global good of your company.

In their book, Strategic Logistics Management, James Stock and Douglas Lambert described five types of logistics costs as they relate to customer service as well as to each other: transportation costs, warehousing costs, inventory carrying costs, lot quantity costs, and order processing and information costs.

Do you know the costs associated with your current customer service levels? It is often possible to measure the direct costs of providing a certain level of customer service. On the other hand, it is also difficult to assign a dollar value to providing or not providing a certain level of service.

Do you know the costs associated with your transportation set-up, i.e., the total cost of moving goods to and from your facilities? Do you know your warehousing costs? This is where increasing or decreasing the number of warehouses becomes important.

What are your order processing and information costs? These are all of the costs associated with processing a customer order.

What are your lot quantity costs? For example, if you buy a larger "lot" of goods, you are going to get a better discount than if you buy the goods one at a time. But at some point, you are going to wind up just storing goods that you don't need, which you bought simply in order to get the discount.

What are your inventory carrying costs? How much are you paying to store your goods each day? Information technology can often help answer the preceding questions in an ongoing fashion.

Cost's partner-in-crime, so to speak, is time. Have you ever bothered to find out how much time, on average, is needed to process an order? The emphasis here, obviously, must be on minimizing the time it takes to fulfill your orders.

What are the promised and actual lead times on your average order? If you find a lot of delays or partially filled orders, find out why.T here could be any number of culprits, including a supplier, a distribution center or an assembly line.

Location

Now, let us talk about the location of the goods. The logistical objective here should be to minimize the time spent resolving questions about the location of goods.

Where are your in-transit goods located? Find out how in-transit problems are normally identified.

How definitively can delivery times be estimated? The more definite the delivery window, the less time people spend worrying about the location of the goods.

Have you brought in the bar codes and optical scanners that really help you track the location of goods through your supply chain? Do you have the inventory management software you need, to go along with those bar codes and optical scanners?

Configuration

Are pallets of goods being broken apart or consolidated excessively? If so, find out why, and do something about it. Conversely, are pallets of goods being broken apart too early in the flow? Or are they consolidated too late in the process? There also may be missed opportunities to get bulk shipping discounts.

Specific Characteristics

Do the characteristics—for example, the color—of your goods ever change in concert with changes in configuration or location? If not, find out why. The emphasis here should be on processing things in parallel or in tandem. Doing two things at once, or nearly at once, can save you cost and time.

These are general examples of ways by which you can use the power and clarity of the Tri-Level View to unlock your company's logistical code and optimize your supply chain.

Adapted from the book "Delivering the Goods: The Art of Managing Your Supply Chain" by Damon Schechter with Gordon Sander. Gordon Sander is a writer, editor, and historian.